Ann Pettifor tells us all about the magic money tree

Ann Pettifor takes to The Guardian to tell us all about....well, it's supposedly about International Women's Day but it's actually about the Magic Money Tree.

Despite all these obvious differences, government budgets are deemed analogous (by economists and politicians) to a household budget.

Standard, absolutely middle of the road, economics does no such thing. It does simplify the arguments into the demotic to get points over to the populace, entirely true, but it simply isn't true that economist equate government and household budgets. There are chapters in each and every textbook detailing why it would be wrong to do so.

 If the economy slumps (as in 2008-9) and the private sector weakens, then like a see-saw the public sector deficit, and then the debt, rises. When private economic activity revives (thanks to increased investment, employment, sales etc) tax revenues rise, unemployment benefits fall, and the government deficit and debt follow the same downward trajectory.

In those same textbooks that's usually under the subject of "automatic stabilisers." This is again absolutely standard, mainline, economics.

 Because government spending (unlike a household’s spending) has a big impact on the economy, governments can use loan-financed investment to expand tax-generating employment – both public (for example, nurses and teachers) and private sector employment (construction workers). Both nurses and construction workers will return a large part of their incomes into the economy through spending, benefitting the private sector. Thanks to the multiplier effect, that spending will generate VAT and corporation tax revenues – for repaying government debt.

That though is Magic Money Tree stuff. Certainly, some of that happens but Pettifor and others take it too far. Some even (R. Murphy for example) insisting that it costs nothing at all to employ a State worker. Because the tax that comes back from having done so entirely covers the cost of their employment. If this were so of course then we'd never have to tax the private sector in order to pay for the public one, would we?

Today this framing of the debate is at odds with reality. After the financial crisis, the Bank of England injected £1,000bn into the private finance sector to prevent systemic economic failure. And after the shock of the Brexit vote, the Bank unveiled the “Term Funding Scheme” as part of a £170bn “stimulus package”aimed at the private finance sector. The money was “public money” offered at a historically low interest rate – to bankers. It was not raised by cutting spending, and it was not raised from “your taxes”, even while its issue was backed by Britain’s taxpayers.

And there we have the second incarnation of the Magic Money Tree. We can just invent money and spend it! Which we indeed can. Again this is entirely standard and mainstream economics. It is called monetisation of spending. Printing money to go and spend it that is. This can be done, this has been done, many a time. Two notable recent examples are Zimbabwe and Venezuela. The result was massive inflation - that in Zim being such that the value of the last 100 trillion $ notes off the press were not high enough to purchase the ink for the next run.

We have indeed done QE but there are two points to that process, firstly it's exactly because we haven't gone off to spend it in the real economy that hasn't caused that inflation. Secondly, QE is reversible and the Federal Reserve and the BoE have been very clear about how they will reverse it. When the time comes they will stop purchasing more bonds to replace those maturing, a process which will destroy again that excess money.

The problem with Pettifor's radical economics is that it isn't in fact radical at all. All of her assertions are dealt with within the entirely standard economics structure.  Or as we might put it, no, really, sorry, there is no Magic Money Tree that we can reliably use.